Although UK unemployment fell to 6.5 per cent, its lowest level since the end of 2009, average earnings increased by just 0.3 per cent in the year to May offering some ammunition to those who believe interest rates will stay on hold this year.

The pound dipped to a session low of $1.7113 but recovered to $1.7125, down 0.1 percent by early afternoon. It was slightly firmer against the euro at €1.2652.

Sterling has been on a bull run for a year now, gaining almost 15 per cent against the dollar and just over 10 per cent against the euro helped by expectations that the Bank of England will be the first major western central bank to raise interest rates.

Although a warning from US Federal Reserve chair Janet Yellen yesterday that US interest rates could yet rise earlier than markets expect also helped bring the pound down off its highs.

Stephanie Flanders, chief market strategist, UK and Europe at JP Morgan Asset Management said: ‘We believe the decision is now finely balanced between a first rate rise in November or early in 2015. The markets are now pricing in two interest rate rises before the general election in May 2015.

'Strong labour force participation trends and the continued weakness of wage growth still offer some justification for holding off. But with the clamour for higher rates coming from some quarters, many on the committee – including the Governor himself - see increasing advantages in a 2014 rate rise, if it allows the bank to tighten more gradually after that.

'This trade off between “early but gradual” and “later but faster” is one we expect to figure prominently in debates about tightening on both sides of the Atlantic in the second half of 2014,' she added.

The pound powered up to $1.7191 against the dollar yesterday and to €1.2642 against the euro as investors bet on an interest rate rise before the end of the year.

Sterling also hit its highest level in six years against currencies from around the world, according to the Bank of England.

Higher interest rates are typically used to curb inflation. At the same time, the prospect of higher interest rates usually boosts the value of the currency because of the promise of higher returns for investors.

The Office for National Statistics said
the consumer prices index measure of inflation jumped from 1.5 per cent
in May to 1.9 per cent in June – its highest level since January.

Although inflation is still below the 2 per cent target, investors have been increasingly convinced the Bank will start raising rates before the end of this year or early next year having held them at emergency lows of 0.5 per cent since March 2009.

The Bank will be watching closely for any further pick up in the pace of inflation, and markets will await with some nervousness the latest BoE Inflation report, due in mid-August.

The Bank will also be keeping an eye on the housing market with official figures on Monday showing UK prices up 10.5 per cent in the year to May while prices in London were 20.1 per cent higher.